The Internet has added an interesting new wrinkle to the world of new business financing. On so-called social lending Web sites, individuals can apply for loans from other individuals. The two parties set their terms and the Web site acts as the intermediary.
One of the more popular social lending sites is called Prosper.com. The site is designed around the auction model popularized by eBay. As a borrower, you register at the Web site and post a loan request for a fixed amount of money at a maximum interest rate. Interested lenders then bid on your loan. When you find a lender that offers an attractive interest rate, you proceed with the loan.
All loans on social lending sites are three-year unsecured loans. Unsecured simply means that the loan is made without any collateral. A credit card is another form of unsecured loan.
LendingClub.com is another social lending Web site, except it uses a system based on your credit rating. When you register at LendingClub.com, the site assigns you a credit rating (A, B, C, et cetera). Different credit ratings qualify for different interest rates [source: Lindner].
Once the loan is approved, the amount is deposited directly into your bank account. Likewise, fixed monthly payments are automatically deducted from your bank account for the life of the loan.